December 08, 2010

Does the Tax Compromise Really Raise Taxes on the Poor?

Update: The answer is "yes" per Mr. Williams at the Tax Policy Center via email:

Low-income workers will pay more tax in 2011 than in 2010, all else the same. Everyone else would see their taxes drop.

The tables we have posted on the TPC website do not include tax provisions from the 2009 stimulus bill in the baseline so the tax changes shown don't consider the fact that people are getting MWP this year. We will post a new table shortly that compares MWP and the payroll tax cut directly--that will show the winners and losers from the effective swap of one provision for the other.

In fact, the only groups likely to face a tax increase are those near the bottom of the income scale — individuals who make less than $20,000 and families with earnings below $40,000. ...

Although the $120 billion payroll tax reduction offers nearly twice the tax savings of the credit it replaces, it will nonetheless lead to higher tax bills for individuals with incomes below $20,000 and families that make less than $40,000. That is because their payroll tax savings are less than the $400 or $800 they will lose from the Making Work Pay credit.

“It will come to a few dollars a week,” said Roberton Williams, an analyst at the nonpartisan Tax Policy Center, “but it is an increase.”

The lead-up to that quote gives the impression that net overall taxes on lower-earning taxpayers will go up under the compromise. And some people have run with that interpretation:

No worries! Poor people don't create jobs, anyway, I hear.

But if you re-read the quote from Prof. Williams at the Tax Policy Center, you'll see it only addresses the change in payroll taxes, not all the elements of the compromise. I went to the Tax Policy Center's website and found this analysis of selected elements of the compromise, including the payroll tax changes:

On that table, everyone gets an overall tax cut. (Although look at the way those making over $500,000 and over $1,000,000 make out! Those are some very happy Republicans.)

I think this means that people making under $20/$40k might have a tax hike of "a few dollars a week" on employment taxes, but get a larger tax cut from all of the other elements of the deal. If that's right, then the New York Times overinterpreted Prof. Williams remark about one aspect of the compromise and reported that the working poor are getting screwed.

And people who are invested in the narrative that this deal is a sellout by Obama ran with it. Welcome to campaign 2012!